China changes bank lending rules

by Laura Ehrenberg-Chesler on July 19, 2013

in Foreign Markets,interest rates

In a positive move for China’s banking system, the People’s Bank of China has removed restrictions on lending rates.  Over the past week or so, we have posted several blogs about China, as well as the slowing rate of growth in that country.

The lifting of restrictions is viewed as a positive step in reforming China’s financial system.  From today’s “Wall Street Journal”:

Under China’s banking system, the People’s Bank of China sets guidelines for interest rates as well as deposit rates—a system that has kept state-run banks flush with cash and ready to fund the big spending projects that have long fueled China’s growth. Banks currently aren’t permitted to set lending rates below 70% of a guideline interest rate set by the central bank. There are no ceilings on lending rates.                                            

The PBOC left untouched its ceiling on deposit rates. Banks can offer deposits that are 110% of the guidelines set by the central bank. Analysts have long said that ceiling reduces the returns for China’s thrifty households and hurts its drive to foster more consumer-driven economic growth.

Still, they said on Friday that the removal of restrictions on lending rates was an important indication of China’s plans to move ahead with financial change. “This is a positive step,” said Song Yu, economist at Goldman Sachs. “It shows the determination of [China’s] new leaders to move ahead with financial reform.”

 

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